VC Perspectives from a Former Entrepreneur – Jeff Bussgang

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Backing Winning Teams

One of the hardest things for an investor tries to gauge is: what are the characteristics that make up a winning team?

A large venture capital firm was recently looking at investing in a follow-on round at one of my portfolio companies and shared an interesting data point with my CEO – the single most highly correlated factor that they found in analyzing hundreds of portfolio companies was actually a very obvious and simple one. If the team had previously been successful and made money as a team, they were significantly more likely to be able to do it again.

Creating companies from scratch is very, very hard. Too often than not, there are soap operas at start-ups and self-inflicted wounds that cause failure. HBS Professor Bill Sahlman, in his seminal work on "What Do Venture Capitalists Do?" in 1989 (!), found that 65% of all start-up failures are due to people issues.

And so it would make sense that a team that has performed well together as a unit and (again, importantly) made money would have a leg up when embarking on a new company again, putting aside their domain knowledge, capabilities or execution skill.

This perspective is one of the factors behind our new investment announced today, SaveWave. The company is a spin-out from my old company, Upromise (acquired by SallieMae in 2006), led by a team I worked with over 10 years ago. The SaveWave team created and managed a successful, very profitable Internet consumer company and built an amazing national network of grocery and drug retailers comprising over 22,000 stores. I'm really thrilled to have the opportunity to work with the team again to take this national network and provide a white label promotions and digital coupons platform across the industry.

So what's the lesson for entrepreneurs who have not yet had a big success to build upon? When evaluating a new start-up opportunity, look to join a team of folks that you would be excited to perform a second act with – and has the characteristics of being winners. The alumni of almost every major successful start-up has spawned numerous other interesting companies. I would argue joining a winning team, and bonding with that team in a manner that transcends the particular start-up you are operating in, is far more important than your specific role in the start-up.

Just to temper the unanimity here, let us all remember the winning teams who go into venture #2 with complete certainty that they know what to do, because they did it before. Nevermind that their original assumptions are now 5 years out of date, they barrel ahead, never bothering to talk to any mere customers along the way…

Yes. When I asked a mentor once how I could get a CEO job when no one liked to hire or back first-timers he said: "find a 'C-' company and make it a 'B+'. Then you have a chance at taking over an 'A' opportunity."

Interesting that you pick the JLA as your pic for this post. No one stumbles into their ranks. They’re well picked and the entire team understands what each brings to the table. And chemistry as a team is certainly part of it.
Martian Manhunter is the only pervasive member. He’s the heart. He settles all of the arguments. He’s the guy everyone respects. While he brings discernable skill to the table, he’s likely there more to be the “glue” than to be the muscle. Batman is the strategist, keeping everyone in the future. Flash is recon, making sure everyone knows what the competitive landscape is like. Superman and WonderWoman build the product: bringing force when force is needed. While everyone participates in that action, it’s those two who are the clear rockstars in that function. The Green Lanterns are muscle, but they’re also partnerships: bringing in outside folks when needed due to their affiliation with a bigger force — The Green Lantern Corps.
But no iteration of the JLA has existed without Martian Manhunter. Without someone that everyone respects and has a soothing tone, the JLA quickly falls apart.
In my experience, startups are the same way. When you can, you launch with people you know and have worked with before. That’s not always an option. What is an option, though, is making sure all of your functions are covered and you have someone in place who everyone respects who can settle arguments quickly and easily.
Though I have worked with the same team in 2 of the 3 startups I have worked in. And those two went onto successful exits. And we had the same Martian Manhunter for both of those.

Completely concur on the need for a winning team. It starts with the talents that each person brings to the table in getting a start-up off the ground.
In fact, I would argue that 100% of start-ups fail because of the people. The idea might not work, the market might not adopt, a better funded competitor flood the market, or an economic tsunami might wipe you out. The team that can recognize these dangers however can make fundamental changes to survive and thrive by launching into a new market, modifying the product, adjusting the focus, and outflanking the competition.